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Korean, Japanese experts outline their countries' problems, solutions

Erich Parpart

The NationJanuary 22, 2014 1:00 am

Japan is adjusting its tax structure to combat the growing problem of an ageing society, while South Korea is tackling decelerated economic growth and lower domestic investment by providing subsidies for small and medium-sized enterprises.

At an event hosted by the Konrad Adenauer Foundation in cooperation with Chulalongkorn University, a professor from Japan and an economist from South Korea explained the problems these two high-income countries are experiencing and the solutions their governments have come up with.

Koji Sakuma, general manager and chief economist of the Institute for International Monetary Affairs in Japan, highlighted the ageing society as the main reason for that country's rising public debt, now more than 220 per cent of gross domestic product, the highest level among the giants in the world economy.

"The problem of the ageing society was dismissed in the past and now we are suffering from it. Rising public debt in Japan is a result of growing social-welfare expenditure that was brought on by the increasing senior population," he said.

"Social-welfare expenditure accounts for 20 per cent of our GDP. The cost is covered by public insurance, which means the Japanese central government has to pay for such [benefits] as pensions and medical bills from their pocket without [enough] revenue to support it, which eventually led to the high level of public debt."

According to Sakuma, high public debt is causing problems for the development of soft infrastructure and domestic investment in Japan.

He said the high expenditure on social security was preventing the Japanese government from investing for the future, as seen in public education, which accounts for only 3.3 per cent of GDP. Another problem is lower private investment, especially in SMEs, because of higher interest rates.

He said the Japanese government was preparing to cut back on social-security spending and raising the consumption tax to combat the problem of high public debt.

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It is preparing to lower the amount spent on pensions for elderly people by dividing them into two age groups. Citizens aged 75 or higher will receive the same amount of financial help but those between 65 and 74 will see their pensions lowered.

Another measure is to shift from direct to indirect taxation by increasing the consumption tax from 5 per cent to 8 per cent, with the ultimate aim of 25-30 per cent in the future. Japan also aims to increase its investment for the future by providing allowances for lower-income families to spend on their children's education.

"Structural reform for an ageing society needs to be done before it becomes a problem, because once it becomes a problem it is hard to fix. In Japan, most [many] voters are elderly citizens, which mean that it is harder to lower the pension rate, and this will become even harder in the future," Sakuma warned.

Bokyeong Park, a professor at Kyung Hee University's Graduate School of Pan-Pacific Studies in South Korea, believes that the current slow rate of economic growth in his country is due to economic disparity and lower demand from abroad.

"South Korea's GDP depends on the exports of 30 companies, accounting for 85 per cent of the country's revenue. Two companies, Hyundai motor company and Samsung Group, account for 50 per cent of all Korean companies."

Park explained that this disparity was causing problems for Korea's SMEs because they are unable to expand and compete with the big companies, which leads to lower domestic investment and lack of innovation from the smaller firms.

South Korea's export sector has also been hit by reduced demand for its goods because of economic crises in Europe and structural reform in China.

To combat the problem of economic disparity and low level of domestic investment, Park said South Korea was planning provide subsidies for SMEs to use in investment and planned to help them further by lowering their production costs through discounts on electricity.

During a question-and-answer session, Park suggested that countries trying to emerge from the "middle income trap" should increase their spending on research and development. South Korea increased its R&D budget from 0.3 per cent of GDP to 3 per cent in 10 years.